15. DEFENSE TACTICS

§ 5:75 In General

The practitioner’s goal in defending a Trust Fund Recovery Penalty is to remove the onus from one’s client and place it on some other person or in the alternative to limit the amount of liability. Literally, one of the best ways to protect your client is to use the “he did it” defense. Blame someone else!

§ 5:76 “He Did It” Defense

The “he did it” defense can first be asserted at the initial interview of your client. Be prepared to present documentation to support why another person bore ultimate responsibility for payment of the taxes. The best evidence may be affidavits from third parties and your client asserting that some other party was responsible.

§ 5:77 Protest

Upon receipt of the letter proposing liability, submit a protest in the format set forth on the back of the IRS letter. Even if your client is a responsible person and willfully failed to pay the tax, you may protest the computation of the tax. It is not unusual for the IRS to miscalculate the Trust Fund Recovery Penalty and you have the right to assure that the penalty is in the proper amount.

§ 5:78 Mail Protest By Certified Mail

When you submit your protest, send it certified mail, return receipt requested. The IRS has shown a remarkable ability to lose protests and erroneously assert the Trust Fund Recovery Penalty. If the deadline for protest is imminent, hand deliver the protest and secure an acknowledgment from an IRS employee.

§ 5:79 Securing IRS File

Contemporaneous with submission of the protest, request a copy of the IRS file including the computation sheet, Form 4180, Form 4183, transcripts of account, and documentary evidence. Most IRS districts have a policy of voluntarily providing such information upon request. If you are denied access to the documents, you may make a request for the data pursuant to the Privacy Act [5 U.S.C.A. § 552a] and the Freedom of Information Act. [5 U.S.C.A §552; see §§8:27 and 8:28 to 8:29 of this work] Requests are submitted to the District Disclosure Office and must contain an offer to pay copying costs.

§ 5:80 Failure To Protest

If your client fails to submit a protest within 60 days (90 days if abroad), the Trust Fund Recovery Penalty will be assessed against her, and the IRS will commence the collection process. Once an assessment is made and notice given to the client, the IRS gains the right to seize your client’s wages, bank accounts, and other assets. After assessment the taxpayer may still pay part of the tax and file a claim for refund.

§ 5:81 Deduction Of Payments On Trust Fund Recovery Penalty

The Tax Court has held that payments on Trust Fund Recovery Penalties are not deductible. The Court has held that the taxpayer may claim a deduction under any of the following IRC §§ 162, 165 or 166.